Many of us are busy submitting proof of investments to our employers. While many will have to do it in next two months. Sometimes the investment proof varies from what we have declared in the past And the obvious reason is delay in our financial decisions leading to change in selection of instruments at last moment.
However, most of the tax saving instruments available has some limitations which investors have to take notice before they make their commitment. These limitations sometimes can land you in confrontation with income tax department if you haven’t read the terms carefully. Hence, it’s become equally important to understand the nitty-gritties of a product before you decide to invest in it.
Section 80C
1. Life Insurance: The most featured investment for tax saving and highly misunderstood as an investment product. The regular feature of yearly premium makes it an ideal product for tax savings as you do not have to plan every year. However, you have to take note of the rules even before your agent or friend advice you to invest.
The first rule for claiming Rs 1 lakh benefit from insurance premium states that your life cover in the policy has to be minimum five times of annual premium. If it reduces, the tax benefit will reduce proportionately. So if your SA is 1.25 times of annual premium then you can avail only up to Rs 25000 as tax benefit. In other words the yearly premium paid has to be less or equal to 20% of life insurance cover.
The rule extends to the maturity/death benefit claimed under section 10 (10) d. If in any year the premium exceeds more than 20% of SA, then proceeds received at maturity or on death of life insured will be fully taxable.
The premium contribution has to be continued for the minimum time period stipulated. If you exit before this you lose the tax benefit claimed in the previous years.
In ULIP products the SA may not be constant throughout the policy term which can be a big setback for the investors. If the SA reduces going forward then you might claim for 80C benefit, but will lose upon the tax free maturity. Although very much will depend on how the taxman interpret it, but how many of us will like to have confrontation with tax authorities…..Better be safe side then sorry
2. PPF: A very lucrative tool for tax saving especially after government increasing investment limit to Rs 1 lakh. A long term product, the interest you earn is also tax free making it the most high yield instrument among all savings schemes. Investors who wish to open a PPF account for tax investment should be aware of following rules-
Contribution to spouse account does not entitle you to claim tax benefit.
A minor PPF account is clubbed with parents/guardian income. Hence if parent/guardian has a PPF account on his/her name, the tax benefit can be claimed on only on one account with a maximum limit of Rs 1 lakh.
3. ELSS– An equity investment product from Mutual Funds, it has been one of the favorite during market uprising. However, in last three years the performance has been swaying investors away. The reasons can be risk return characteristics which as an investors we fail to take notice. There are also some points which should be considered while investing-
Investing through SIP is a good benefit. However, every SIP installment is a fresh investment which gets locked in for three years. So, if you have done SIP for one year, you will be able to withdraw the full amount after four years and not three years.
There is no liquidity before three years. Hence you cannot withdraw any amount before the lock in period.
Dividend if reinvested also gets lock in for three years. Hence, if you have received dividend in the third year of your ELSS investment it will get lock in for next three years, if reinvested, since it is counted as fresh investment.
Section 80D
Health Insurance too gives tax benefits on the premium you pay for covering yourself and parents. A deduction of Rs 15000 is available for buying a mediclaim for yourself, spouse and childrens. If you have dependent parents, then you can claim up to Rs 15000 (Rs 20000 for senior citizens) on premium paid for their health insurance policy. This product too has its own rules which should be well known for claiming the tax deduction-
The premium paid through cash does not qualify for any tax benefit.
There are floater policies which cover your parents along with you. It will be difficult to claim tax benefit for parents since insurance company do not give bifurcation of premium. It will be the call of IT Person to interpret it.
For tax benefit what matters is who made the premium payment and not who the insured is. So if you are only the proposer and insured is your family, then you can only claim the tax benefit.
If both your parents are senior citizens then you can claim up to Rs 40000 on their individual insurance.
Investing in tax saving instruments is a very important decision as some of them impact your financial goals. But sometimes due to last minute decisions we do not take notice of minute details which may end up in losing the gains we have received. A brief check on the details of tax implications can help us in making prudent decisions.
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